Why Mechanics Bank Said "Yes" to the Capital Purchase Program (Q&A)

Q. Mechanics Bank's Board of Directors voted to approve the bank's participation in the U.S. Treasury's Capital Purchase Program. What does that mean?

A. The CPP is part of the Troubled Assets Relief Program (TARP). It was intended to inject additional capital into the banking system to create more stability during these volatile times. Qualifying banks--and only healthy banks were eligible--were invited to apply for up to 3% of risk-weighted assets. In exchange, the Treasury would receive preferred stock (essentially debt) at an after-tax cost to the bank of 6.45% during the first 5 years of the program. For more information, go to the U.S. Treasury Press Release.

Based on the Treasury's formula, Mechanics Bank will receive $60 million of additional capital under this program.

Q. Did the Treasury specify how must this money be used?

A. The Treasury has imposed relatively few restrictions on how banks can use this money, mostly leaving it up to the participating banks to determine the best use. Certainly making more loans is seen as an excellent use of the capital.

Q. Why did Mechanics Bank elect to participate? Does the bank need the additional capital?

A. Although we are extremely well capitalized and don't need additional capital, we felt there were compelling reasons to take it.

The most important reason is the rapidly deteriorating economy. There is no way to know how deep and how long this recession may last. Despite the fact that we don't need the additional capital today, there is no way to foresee the future--and we get only one chance to sign up for the CPP. The local economy is likely to get worse and California still has not dealt with a huge budget deficit that may result in higher taxes that further sap the economy and local businesses. The prospect of continued job losses is very real, and while we've always felt fortunate to operate in a resilient, diversified local economy, this recession seems to have hit every sector hard. If 2009 becomes a worst-case scenario, we might regret not taking this additional low-cost capital and the flexibility it will give us.

Q. Was the weakening economy the only reason to participate in the CPP?

A. It was a very important reason. However, there are positive reasons, too. We believe the additional capital could give us new options. Not only will the capital strengthen our balance sheet but it will also enhance our ability to help our valued clients with new credit through this difficult period. And additional capital will come in handy if a truly excellent growth opportunity arises.

Q. Isn't this just a taxpayer-financed bailout of banks? Why should taxpayers pay to fix problems that banks created for themselves?

A. It's easy to see why people could think that, since the program is part of the Troubled Assets Relief Program. However, the Capital Purchase Program is not a “bailout." In fact, the CPP is only available to strong banks and requires that we pay the government back the principal plus a 5% dividend yield. This capital allocation is, in fact, a confirmation of our strength and stability.

Q. How will the CPP capital affect the Bank's earnings?

A. Of course, no one can foresee the future. But if we are successful in using this capital wisely--and we are confident we will be--not only will the Bank make higher profits but the economic return on common shareholders’ equity will also be accretive.

Q. Aren't there some risks inherent in taking the money?

A. Of course there are risks, and the Board carefully considered them all. The most important one is that even though the CPP is only open to healthy banks, some people may view our taking money under the TARP as a “bailout." But the fact is that Mechanics Bank continues to be well capitalized and does not need the additional capital at this time. We see CPP participation as a means of preserving our flexibility during a volatile economic period.

Another potential concern is that the CPP agreement is open-ended, providing that the Treasury may change the program at any time after the money is accepted. However, banking is already a heavily regulated industry. We at Mechanics Bank have proven our ability over the years to achieve profitable results while maintaining scrupulous compliance to all banking regulations. We are confident we will be able to prudently manage adherence to any new regulations, as well as meet meet the credit needs of our valued clients.

Q. Why didn't Mechanics Bank opt out for now, and wait to see if they needed capital later?

A. Banks only get one chance to participate. If we say "no" now, we don't have the option to change our minds later.

Q. What did your competitors decide to do? Did they participate?

A. The Treasury will publish a list of banks that opted to participate in the CPP. If banks aren't on the list, we have no way of knowing whether they simply chose not to apply, applied and were not approved, or were approved but chose to decline. Like us, every bank had to make its choice based on its unique needs and circumstances.